Promises, trust, and contracts

A transaction involving a buyer and a competitive seller isstudied under the hypothesis that individuals may have a certaintendency to keep promises. The parties can choose a completecontract where costly arrangements are made so that it is verifiablewhether the seller has delivered a certain quality. Alternatively,they can choose an incomplete contract where the quality agreedupon by the two parties is unverifiable, and one party is giventhe residual right to decide whether the quality is indeed delivered.Although complete contracts are always available, it may beoptimal to use incomplete contracts, and social surplus canincrease in contract costs. Social surplus is higher when thebuyer has the residual right if under this arrangement incompletecontracts are optimal; and social surplus is higher when theseller has the residual right if only under this arrangementincomplete contracts are optimal.     

Culture, caution, and trust

Trust is an important determinant of economic development. Understanding its origins is therefore critical. We develop a principal-agent model with heterogeneous players to determine the aggregate amount of trustworthiness and trust in a society. People are distributed according to their preference toward caution, which we model as loss aversion. The first two moments of the distribution across principals and agents—along with institutional quality—are critical to the process by which trustworthiness and trust are formed. A direct effect suggests that more caution leads to less societal trust. An indirect effect of greater caution, working through trustworthiness, leads to more trust. Paradoxically, the net effect is almost always positive. The results are similar when we use expected utility theory. Different distributional assumptions can influence the results.     

Political preference functions,trade wars,and trade negotiations

The integration of elementary political considerations into computable general equilibrium models is considered, and an extended illustration to agricultural trade negotiations provided. The application involves an evaluation of the payoffs of alternative support levels to agricultural and non-agricultural interests in the EC and the US. A government political preference function for each region is calibrated as a CES aggregation of the payoffs to the two interest groups, with weights corresponding to their benchmark political influence. The political preference function is presumed to be employed by each government to determine the level of agricultural support. The analysis illustrates how sensitive such computable general equilibrium models can be to elementary political considerations, mainly due to the flatness of the implied Pareto frontier. It also illustrates how one can modify the traditional political preference function approach to accommodate possible convexities of the Pareto frontier in empirical models.     

Uncertainty, power and trust

This paper suggests that personal trust is best understood as a discursively constructed social relation that arises when interaction between people is governed by the norm of reciprocity (according to which one good turn deserves another and that people should treat others as they themselves would like to be treated). It is argued that trust enables people to deal with their ignorance of the future and so act in a purposeful, goal-driven fashion even in the face of radical uncertainty. However, where there are imbalances of access to economic and cultural resources and to positions of authority, there may arise an imbalance of reciprocity, so that what appear to be relations of genuine trust may in fact be no more than a façade of trust that conceals a relationship of domination.     

Entrepreneurship,trust and corruption

I propose a theoretical model where trust towards strangers is a channel through which institutions determine economic outcomes, in particular, entrepreneurship and corruption. More importantly, I show that the role of trust has been overlooked since high levels of trust do not always enhance desirable economic outcomes. Trust helps individuals to participate in economic exchanges aligned with social welfare, but it also facilitates individuals to cooperate for the achievement of corrupt deals. Under this more general view of trust, the model generates a non-trivial new prediction at the individual level. Specifically, the individual-level relationship between honesty and trust changes depending on the institutional quality of a country. Dishonest individuals are the more trusting individuals in countries with poor institutions, and the less trusting in countries with good institutions. Using individual-level data of 80 countries from the World Value Survey and the European Values Study, I present empirical evidence in support of this prediction.     

Informed trade,uninformed trade and stock price delay

The probability of informed trading (PIN), a measure of information-based trading risk, has been broadly applied to empirical studies on asset pricing. However, it is still controversial whether PIN measures exclusively the risk of firm-specific private information or it also captures the private interpretation of market wide public information. This article examines the relevance of PIN to the delayed response of stock prices to market-wide information. We find that PIN significantly explains individual stock price delay even controlling for size, liquidity and risk, and low-PIN stock prices adjust to market information more rapidly not only because of a notably high level of informed trading but also an even much higher level of uninformed trading. Our findings support the notion that PIN also captures the private skilled interpretation of public common factor information by sophisticated investors, and provide new empirical evidence on how information-based trading affects the speed at which stock prices adjust to information.     

Trust,trust games and stated trust: Evidence from rural Bangladesh

Levels of trust are measured by asking standard survey questions on trust and by observing behavior in a trust game using a random sample in rural Bangladesh. Follow-up questions and correlations between stated expectations and the amount sent in the trust game reveal that the amount sent is correlated with a general measure of trust. The trust and need motives combined with expectations explains differences in amounts sent, and this highlights the potential importance of motives that cannot be inferred directly from people's behavior and expectations alone.     

Group status,minorities and trust

We present the results of an experiment measuring the impact of low group status and relative group size on trust, trustworthiness and discrimination. Subjects interact with insiders and outsiders in trust games and periodically enter markets where they can trade group membership. Low status and minority subjects have low morale: that is, they comparatively dislike being low status and being minority subjects. Group discrimination against low status and minority subjects is unchanged. However, low status subjects are deferential to high status subjects in terms of comparatively higher trust, and minority subjects are deferential to majority subjects in terms of comparatively higher trustworthiness.     

Effort, trade, and unemployment

Abstract.  This paper incorporates equilibrium unemployment caused by efficiency wages into a monopolistic competition model of trade. Worker effort is treated as an endogenous variable that depends on the optimizing behaviour of firms and workers. Opening up trade induces firms to demand greater worker effort and to cut the size of their workforce. This counteracts the positive employment effect due to entry of firms. Circumstances are indicated in which the two effects just balance, leaving aggregate employment unchanged. Trade unambiguously increases worker effort, thereby enhancing within-firm productivity.     

Effects of Islamic religiosity on bilateral trust in trade: The case of Turkish exports

Using a rich firm level data set for Turkish manufacturing, we test whether sharing similar religious beliefs with potential contracting parties drives a firm’s first time entry into export markets. We exploit variation in the practice of Islam across Turkish NUTS3 regions and we find that firms located in regions characterised by stronger religiousness are more likely to enter export destinations with a higher share of Muslims among their population. This result is robust to the control for past trade, common language, cultural and migration ties as well as for selective trade policy in favour of politically connected religious business groups. In particular, religious proximity eases export entry for producers of “trust intensive” goods, it favours subsequent foreign market entries and reduces the export exit probability. All in all, our evidence supports an export enhancing effect of religious proximity working through export sunk costs reduction rather than through similarity in preferences.     

Complementarity, growth, and trade

We consider an endogenous growth model with international trade in complementary capital goods. The model possesses several distinct, balanced growth solutions, which we classify using stability under adaptive learning. Some of the equilibria can involve growth rates much higher than others. We show that, in addition to a small (usually positive) effect on a given equilibrium, an expansion in trade may sometimes yield a much larger, sudden jump in growth. The small effect on the initial equilibrium may reduce growth if the opportunity cost of capital rises very fast as growth accelerates. JEL Classification: F12, F15, O41
Complémentarité, croissance, et commerce international. Les auteurs utilisent un modèle de croissance endogène en présence de commerce international de biens capitaux complémentaires. Le modèle possède plusieurs solutions de croissance équilibrée distinctes que les auteurs classifient en utilisant des mesures de stabilité avec apprentissage adaptatif. Certains de ces équilibres peuvent impliquer des taux de croissance plus élevés que d'autres. Il appert qu'une expansion du commerce international, en plus d'avoir un petit effet (habituellement positif) sur un équilibre donné, peut parfois engendrer une augmentation plus forte et soudaine de la croissance. Le petit effet sur l'équilibre initial peut réduire la croissance si le coût d'opportunité du capital augmente rapidement à proportion que la croissance accélère.     

Entrepreneurs,jobs, and trade

We propose a simple theory of endogenous firm productivity, unemployment, and top income inequality. High-talented individuals choose to become self-employed entrepreneurs and acquire more managerial (human) capital; whereas low-talented individuals become workers and face the prospect of equilibrium unemployment. In a two-country global economy, trade openness raises firm productivity, increases top income inequality, and may reduce welfare in the country exporting the good with lower relative labor-market frictions. Trade openness reduces firm productivity, lowers top income inequality, and necessarily raises welfare in the other country. The effect of trade on unemployment is ambiguous. Unilateral job-creating policies increase welfare in both countries. However, they reduce unemployment and raise top income inequality in the policy-active country; and reduce top income inequality while increasing unemployment in the policy-passive country.     

Law, trade, and development

This paper uses a Ricardian model to generate predictions about the influence of institutions on trade in differentiated (complex) and commoditized (simple) products and then uses a rich international trade data set for empirical tests. The model draws the distinction between the role of international transaction costs and domestic production costs in the trade of complex and simple products. The effects of institutions predicted by the model are identified with a three-step estimation procedure. We find that when countries have low quality institutions, institutional reform primarily influences production costs and has little influence on the volume of trade. Institutional reform, however, increases the diversity of exports in complex goods markets. Conversely, in countries with more developed institutions, institutional reform primarily influences transaction costs and is associated with gains in the volume and the diversity of complex exports.     

Lobbying, multisector trade, and sustainability of free‐trade agreements

Abstract.  This paper is concerned with the sustainability of free‐trade agreements (FTA). FTA sustainability is influenced by governments' valuations of political contributions, discount factors, the lobbying position of the specific‐interest groups in the intra‐industry trade sectors, and the sectoral coverage of the FTA. I find that (i) under certain conditions, the FTA under protectionist lobbying could be more sustainable than the FTA under no political pressure; (ii) the lobby‐supported FTA is more sustainable than the lobby‐opposed FTA and the FTA under no political pressure; and (iii) multisector trade enhances FTA sustainability. JEL Classification: F12, F13, F15.     

Energy,unemployment and trade

This article investigates the dynamic relationships among sectoral economic activities, macro expenditure patterns, renewable and non-renewable energy consumption and unemployment in 41 countries from 1980 to 2014. The state of the art econometric techniques, both linear and non-linear panel and time series estimation techniques are used. The results show that industrialization, services sector, government expenditure and trade openness play a positive role in reducing unemployment, while agriculture and renewable energy consumption increase unemployment. This might be, in part, due to recent technological advancements and large capital intensive investments in agriculture and renewable energy sectors. Therefore, dedicated social and labour market policies need to be adopted to complement greening economic policies.     

Growth,technological progress,and trade

I would like to thank Gene Grossman for allowing me to use insights from our joint ongoing work in the preparation of this paper, and to Paul Romer and Martin Weitzman for comments on an earlier draft.     

Partnerships, lemons, and efficient trade

We analyze the possibility of efficient trade with informationally interdependent valuations and with a dispersed ownership. A main role is played by the effects of adverse selection on incentive payments and budget constraints. Variations in the degree of interdependence directly influence the incentive payments and ultimately lead to a tightening or relaxation of the budget constraint, thus affecting the ability to achieve efficient trade. We derive precise possibility conditions for efficient trade, and we offer a framework in which the interplay of insights previously obtained by Akerlof (Quart. J. Econom. 89 (1970) 488), Myerson and Satterthwaite (J. Econom. Theory 28 (1983) 265), and Cramton et al. (Econometrica 55 (1987) 615) can be analyzed. In addition, we discuss to what extent possibility results previously obtained for private values environments can be generalized.     

Wage inequality, technology, and trade

The recent widening of wage inequality has been attributed by some to skill-biased-technical-change and by others to trade liberalization. This paper examines the two explanations within a unified model and also presents a new modeling of skill-biased-technical-change, where skilled workers replace unskilled ones. As a result technology adoption is endogenous and does not occur in all countries. Hence, wages for both types of workers, trade patterns and also factor productivities in all countries are endogenously determined. The model sheds light on the relationship between technology and trade, on the reasons for global productivity differences and on the causes for the recent rise in wage inequality.